Pensions emerge as key issue in Calif budget talks

SACRAMENTO, Calif. 
A partisan split over how to change California's massively underfunded pension systems is playing an increasingly prominent role in the debate over Gov. Jerry Brown's plan to fix the state's woeful budget.

Democrats, who control both houses of the Legislature, have scheduled votes this week on the governor's plan, which balances deep spending cuts with an extension of tax hikes enacted two years ago.

Brown wants lawmakers to call a special election in June to ask voters for a five-year extension of the higher personal income, sales and vehicle taxes passed in 2009, raising about $9.2 billion a year. Lawmakers also will vote on $12.5 billion in spending cuts, including reductions in welfare, social services and higher education, as the second leg of the Democratic governor's plan to bridge the state's nearly $27 billion budget deficit.

The governor also has proposed about $3 billion in other solutions, including changing part of the tax structure for businesses, repealing the tax benefits associated with local enterprise zones and shifting money between various state accounts.

Brown and Democratic leaders said they are willing to bargain on pension reforms to get the four Republican votes they need - two each in the Assembly and Senate - to reach the two-thirds vote threshold for placing a measure on the ballot.

Republicans so far have refused to support the tax extensions. They say the state must first make fundamental government reforms, led by restructuring a pension system filled with benefits that disappeared long ago for most the private sector.

"We have an unfunded pension liability of massive proportions, and we have got to get a handle on this pension crisis," Sen. Mimi Walters, R-Lake Forest, said after a committee hearing on the state's pension system last week. "We're going to have to have major reforms. We have to look at the whole, entire pension system."

Walters has introduced a series of bills seeking various changes.

The California Public Employees Retirement System has at least $75 billion in unfunded pension liabilities. The state also faces nearly $52 billion in unfunded retiree health care benefits.

Costs to the state general fund also are projected to rise, especially with the expected wave of baby boomer retirements. Neither the state Department of Finance nor the Legislative Analyst's Office has projected how much of the state's general fund might be consumed by pension payments in the years ahead if no changes are enacted.

But local governments provide an indication: According to the Little Hoover Commission, a state auditing agency, one-third of Los Angeles' operating budget could go to paying employees' retirement costs by 2015. In San Diego, it could be half of general fund spending by 2025.

City officials told the commission the payments already are sapping money from other services and forcing the closures of libraries, community centers and swimming pools.

Republicans' concerns were bolstered last month by a Little Hoover Commission report that recommending freezing pension benefits for current employees.

The shift would face major legal hurdles, said commission executive director Stuart Drown. But he warned lawmakers that targeting only future employees, as previously has been proposed, will not lead to sufficient savings to prevent pension payments from eating into vital public services.

Public pensions "have become a vehicle for wealth accumulation," Drown said. "Benefits at this point are too generous."

The comment was criticized by Democratic lawmakers, pension system operators and representatives of public employee unions.

Democrats and labor leaders concede there are abuses and that steps must be taken, through collective bargaining with public employee unions, to limit the long-term liabilities. But they argue the payouts generally are reasonable.

The average pension from the California State Teachers' Retirement System is less than $40,000 a year, the system's chief executive officer, Jack Ehnes, said. The average from the California Public Employees' Retirement System is $27,000 a year, and 78 percent of the system's retirees receive $36,000 a year or less, said chief executive officer Anne Stausboll.

Those figures, however, can be misleading, in part because they include people who have been retired for many years and earned far less during their career than more recent retirees. A 30-year employee who retired in 2009 averaged more than $66,000 in annual payouts, while many others have annual pensions in six figures.

People who worked for state government for 30 years and retire today at age 63 will be paid 75 percent of their highest salary each year for the rest of their life, according to the Little Hoover Commission report. With Social Security, the report said, the employee will earn more in retirement than when he or she was working.

"We're talking about employees who have dedicated their careers to serving the public," said Stausboll, who heads the nation's largest public pension fund, with 1.5 million members.

Absent a sweeping agreement with Republicans, the chairmen of the Assembly and Senate pension committees said they intend to focus on ending some of the worst pension abuses that drive up costs and liability, rather than making major changes.

That includes ending "pension holidays," in which contributions to pension funds are allowed to lapse during good economic times; "double-dipping," in which retirees receive more than one pension; and "pension-spiking," which inflates payouts by boosting a retiree's salary near the end of his or her career.

"We know that pension reform is needed, but we don't want to throw the baby out with it," said Assemblyman Warren Furutani, D-Lakewood, chairman of the Assembly Public Employees, Retirement and Social Security Committee.

They have plenty of pension reform bills to consider, including 10 from Walters, who is vice-chairwoman of the Senate Public Employment and Retirement Committee.

Her SB520 would put new public employees into a 401(k)-type defined contribution retirement plan similar to that offered to most private-sector employees. It's a variation on the Little Hoover Commission's recommendation that the state convert from its current defined benefits plan to a hybrid model that would include something similar to 401(k) plans.

Here are some other pension bills lawmakers will consider in the coming weeks:

- The minimum retirement age would increase to 55 under Walters' SB525.

- She would prohibit "pension spiking" under SB526 by requiring that state employees' pensions be based on a three-year average salary before retirement, rather than the single highest salary.

- Walters' SB527 would end collective bargaining for pension benefits by public employees, with the exception that bargaining could continue over the amount employees will contribute to their pension plans. Assemblyman Allan Mansoor, R-Costa Mesa, has a similar bill, AB961.

- Elected officials would no longer serve on the CalPERS board under SB528. Walters argues they have a conflict of interest because they help set their own pensions.

- CalPERS' reporting requirements would be changed under SB820. Walters contends current requirements allow the funds to present an overly optimistic investment picture.

- Public employee pension systems would be required to file disclosure reports annually to the Legislature for retirees earning more than $100,000 annually, under SB689 by Sen. Tom Harman, R-Huntington Beach.

- Public officials and employees would forfeit their pensions if they are convicted of a felony connected with their professional duties, under SB115 by Sen. Tony Strickland, R-Thousand Oaks. The measure responds to the pay and benefit scandal in the Los Angeles-area city of Bell.